Tag Archives: Currency

Nationalism, Governments and Currency.

The political left has always been suspicious of nationalism. Certainly it is easy to think of examples where nationalism has been taken to extremes with disastrous results. However we do, like it or not, all have to recognise we live in nation states. We might consider ourselves citizens of the world, or citizens of Europe or whatever, but that has to go along with being a citizen of a particular country too.

The traditional model is that we have a country, a government and a currency to go with it which is essentially an IOU of that government. So, for example, we have a country called Vietnam with its own government which issues a currency called the Dong. A neighbouring country, Cambodia, has its own separate government and uses the Riel. You might want to remember these names if you are into pub quizzes!

The people of Cambodia and Vietnam could, if they chose to, unite into a single country, have  a single government and a unified currency. That could make sense, but it would be entirely up to them to decide to do that. What would make much less sense is for them to try to share a currency without unifying their countries. The power of being able to control a currency is very considerable but not easily shareable. If we write our own IOUs as a settlement of a debt we want those IOUs to be unique. We don’t want anyone else writing them out on our behalf. So if Vietnam and Cambodia were to try sharing a currency it probably would not work at all well. There would soon be a dispute over how many IOUs each could create and the two countries would revert to separate currencies very quickly.

This is a similar pattern the world over. Canada has a different dollar from the USA. Australia has a different dollar from New Zealand and so on. There are seemingly some exceptions. Ecuador uses the US dollar. But it cannot create any US dollars of its own. Only the USA can do that, and as many as it likes to stimulate its own economy when needed. That puts Ecuador at a big disadvantage. I would recommend them to introduce their own currency! There is a similar situation in Puerto Rico which also uses the US dollar. But Puerto Rico is not considered part of the USA. If that were to change it would make much more sense for them to use the US dollar. Puerto Rico citizens would become American citizens and pay taxes to the US Federal Govt and receive the benefits of spending by the Federal Government. There would probably be more spending than taxation just as there is in other less affluent US States.  Then they would be truly sharing a currency and not just using someone else’s.

So one way we can define our own feelings of nationalism is by asking ourselves who we would like to share a currency, and a government, with. At present we, in the UK, share a currency, which we call the pound, between the countries of England, Scotland, Wales and Northern Ireland.  Other parts of the world, like Gibraltar and the Channel Islands use the pound but do not share the pound and so are not part of the United Kingdom. If Scotland were to become independent it could not share the pound, it could only use the pound. I am not sure if those Scottish nationalists who argue for a shared currency really appreciate the difference or the potential difficulty.

The big exception in the eurozone. We’ll look at that, and the problems it has, next.

Governments should spend more and tax less to reduce their deficits.

There’s no mistake in the title! To understand economics as it works at the macroeconomic level means we cannot just assume that what works for us as individuals or households also works for currency issuing governments like the UK, the USA and Australia. At first look,  it’s almost as if we have gone down the rabbit hole and we really are in a parallel universe. It is tempting to quote Lewis Carroll’s Queen in “Through the Looking Glass”:

“Why, sometimes I’ve believed as many as six impossible things before breakfast.”

But Alice was quite right in saying:

 “one can’t believe impossible things.” 

We just need to look at the problem from the right perspective to make sense of it all. Any currency issuing government, such as the USA, the UK, or Australia  need never have a Greek type debt problem providing it understands how its own economy works.

The government deficit can be expressed as:

Govt Deficit = Savings of Everyone Else = Private Domestic Savings + International Savings


Govt Deficit = Private Domestic Savings + BOP deficit(trade)

In other words, if everyone else in the world wants to save in US dollars, UK Pounds or  Australian dollars which they must if want to sell these countries more stuff than they buy from them, then the governments, or the Private Domestic Sectors in these countries, have to run a deficit.

If the Governments try to reduce their deficits by cutting spending and raising taxes then all they will do is force their economies into recession or even depression.

If they do really want to reduce their deficits, they would have to discourage everyone else saving. In the UK, that would include overseas trading partners who sell to the UK more than they buy from the UK and save the difference.

The way to do that would be to keep interest rates low and engineer some inflation, just a few % should be enough,  into the system – by increasing government spending and reducing taxation. So, perhaps counter intuitively, the way to reduce the government’s deficit in the longer term is for it to spend more and tax less in the shorter term.

Note: I’m not arguing that governments should make deficit reduction a primary object of economic policy. The government’s fiscal policy should always be aimed at steering a sensible middle course between having too much inflation on the one hand and too much unemployment and too many business failures on the other.

But, inevitably, there will always be those neoliberal types  who focus on the government’s deficit. They always seem bewildered that it doesn’t change in the way what they expect it to, and this article is an attempt to explain why.


Goodbye to £5 and £10 notes?

The  Bank of England’s chief economist Andy Haldane’s speech. caused some raised  eyebrows recently. It sounds like he knows we’re in for some tough economic times ahead. Things are so desperate that it  might require the abolition of cash in the economy!  People will be forced to hold money in banks and see its value dwindle.

As Andy Haldane has put it “A more radical proposal still would be to remove the ZLB (zero lower bound) constraint entirely by abolishing paper currency.”

We could perhaps begrudgingly say Andy Haldane has shown political and economic courage in saying this. If we are being charitable we could credit Mr Haldane for highlighting the intellectual bankruptcy of most mainstream modern economic thinking. If we wished to be less charitable we’d have to say the idea of abolishing cash is about as stupid as it gets!

I hope it is the former and that cash won’t be abolished. But this isn’t the first time we’ve heard this silly argument argument from monetarist economists and in particular from Kenneth Rogoff. See  here  and  here. That they feel the need to make it shows they still haven’t really grasped that interest rates can’t have the controlling  effect they think they have on the wider economy.

When intelligent men like Rogoff and Haldane have silly ideas, political ideology is usually to blame. The main argument for banning cash, other than to hinder criminals and tax-dodgers, which is no stronger an argument now than it has ever been, is to facilitate sharply negative interest rates. But if we want to stimulate the economy, as we do right now, there’s an obvious and much easier alternative: ie loosen fiscal policy. Increase government spending and reduce levels of taxation.

The only reason to suggest something as outlandish as banning printed currency is that you believe this alternative to be impossible. Or, rather impossible according to one’s own political ideology.

Monetarism all sounds fine – superficially. When times are good interest rates are increased to slow the economy down. When times are bad they are lowered to stimulate lending and get it moving again. There’s no need for government to be involved at all. They can concentrate on balancing the books like any good business should.

Except that every stimulus leads to the build up of private debt in the economy. This build up slows down economic activity, and so we later have to have another reduction in interest rates. Then another and yet another after that . If we get it all wrong then there can even be a giant crash in the economy when those who’ve taken on too much private debt go bust and cause their creditors to go bust too.

So, eventually we arrive at the situation, as we have now, where interest rates in much of the western world  are close to zero and they need to go negative according to the theory to stimulate the economy again. Economists with more intelligence are saying “Whoa! There must be something wrong with the theory”. Others with less insight are saying “But this is just the special case of the zero lower bound” and those with no insight at all, or are stupefied by their own political ideology, are ploughing on regardless and calling for the abolition of cash!

Leaving aside the argument that many of us quite like the convenience of using cash, it’s much quicker than messing about with credit cards at the petrol station for example, it is a genuinely bad idea to go down the road of negative interest rates which will lead to an ever increasing build up of private debt in the economy.

Mainstream (ie Neo -Classical and Monetarist in outlook) economists didn’t spot the onset of the GFC because they didn’t  know where to look for the warning signals. The role of private debt in leading to booms and busts was denied. Expanding the “money supply” was the only standard remedy for stimulating economic activity and the risk of creating asset bubbles was largely ignored with disastrous consequences.

I may come back to the question of private debt in the economy later but for now I’ll just reference Prof Steve Keen’s excellent blog on the perils of debt deflation.

German euros and Greek euros. Are they really the same?

Just like the US dollar, the euro is a single currency which is shared by 19 countries of the European Union.

That’s the official fiction. If the powers-that-be in the EU had really wanted it that way they could have had it that way. They would have needed only one central bank. There would have been one design for each of the various banknotes and one design for each type of coin.

Instead there are multiple country based designs for both notes and coins.  Notes carry a serial number including a country code. There is one national central bank (NCB) per country plus we have the European Central Bank (ECB) .  Whereas most currencies can be considered to be a two layer structure, the euro has a three layer structure. It can be best understood as a collection of tightly pegged but slightly different euros. The Bank of Greece (their central bank) can still print and create euros which they normally do with the approval of the ECB. That approval has been recently withdrawn. So what happens if they create euros without the ECB’s approval? The ECB can only refuse to guarantee them on a par with other euros so instantly the Greek euro would float.

All Greek banks whether domestically owned, or foreign owned, rely on the BoG for their liquidity. So the closure of the Greek banks, including all foreign owned ones, has nothing to do with their financial viability, but everything to do with the inability of the BoG to provide the euros they need to function.

If the euro were a truly single currency the ECB would not be able to isolate Greek banks and their account holders in the way they have. The banks could open tomorrow if the BoG started to create euros again. And indeed they should, preferably with the support of the ECB. The ECB has a duty to all Greek euro holders just as the US Fed has an obligation to all holders of US$. It would be inconceivable that any political dispute between the Federal government and , say , the city of Chicago would result in the residents of that city being denied full access to their bank accounts.

If the BoG issued euros without ECB approval then we’d have a new currency. The Greek euro. Just what would be the status of all previously issued euros, both digitally and physically created would depend on the willingness of the ECB to guarantee them. It would be legally messy but it is a quick solution to get that new currency.

In the EZ, bank depositors, except of course in Greece at the time of writing,  can costlessly shift euro deposits from one bank to another anywhere in the zone. Any depositor of an Irish bank, say,  can move their money to a German bank. This requires the Central Bank of Ireland  to obtain reserves that get credited to the Bundesbank, the central bank of Germany. If deposits tend to flow from the poorer nations,  to Germany in particular, their central banks go ever more deeply into debt to the ECB to obtain reserves that accumulate in the account of the Bundesbank.

As recent events in Greece show, it makes no sense at all for anyone to hold any amount of money in the peripheral banks. The sensible thing is to shift it to a German bank for safe keeping. This is not doing the Germans any favours. It is simply the best way of forcing those most in favour of the euro to accept full liability for euros held by all Europeans. So logically nearly all  euros should end up being German euros anyway!

Is this yet another fundamental flaw in the architecture of the eurozone? The ECB has to guarantee the liabilities of the peripheral NCBs to hold the system together but what if  any country defaults? They will be rid of their National debt at a stroke and can then start afresh with a new currency. The ECB ends up with the bill, which means the rest of the eurozone. Ultimately if everyone else defaults it is Germany, or the last country left in the system, which has to pick up the tab for everyone else.

The Germans should be extremely worried at the prospect of Greece defaulting to be followed by whoever may be next, then whoever is next after that. At the first sign of any repetition of the Greek experience,  savers in the less safe regions of the EZ will, if they are sensible, shift the bulk of their savings out of their local bank and into German euros. They should make plans for doing that now, while there is still  time.

Muddled Thinking Watch #7: Chuka Umunna on Labour’s pre-GFC Deficit

Chuka makes some valid points in his recent Guradian article:


For example he acknowledges that:

” First, we spoke to our core voters but not to aspirational, middle-class ones. We talked about the bottom and top of society, about the minimum wage and zero-hour contracts, about mansions and non-doms. But we had too little to say to the majority of people in the middle.”

Partially right. “The majority of people” are in the middle. So, in a democracy, to win elections, you have to not only speak to, but also win support from,  “the majority of people”. There’s no getting away from that.

Whether Labour spoke to its core voters is a matter of opinion. I’d argue they may have spoken to them, but they didn’t listen, which is slightly different.

He also makes some invalid points. He says:

“Of course, the last Labour government should not have been running (an albeit small and historically unremarkable) deficit before the financial crash. “

The last Labour government certainly made more than a few mistakes. George Brown famously  made the ludicrous claim that he’d abolished “boom and bust”.  The period  of the Labour government  (13 years) consisted of mainly years of boom, which enabled it to achieve electoral success,  except the last 2 years were years of bust, or trying to recover from the 2008 bust, which brought about its downfall.

But did they make a mistake about the government’s deficit? The boom was caused by too much credit being created by the private sector. I don’t believe there is any dispute on that point. That credit inflated asset prices, firstly shares in the dotcom boom and then property prices in the years up to 2008.  With the benefit of hindsight what should they have done to prevent that credit bubble? They, or their so-called “independent” Bank of England,  should have increased interest rates.  If there’s too little saving and too much borrowing then interest rates should rise. Is there any dispute on that point? That would have stopped the credit bubble. No problem.

But if they’d done that there would have been a problem of the £ appreciating in value. Exports would have become uncompetitive. That, and the reduction in domestic borrowing, and therefore, spending, would have led to less economic activity. Business failures and unemployment would have risen.

So what else would the Labour Government have had to do to compensate? Run a tighter fiscal policy, with a lower deficit, or a looser fiscal policy with a higher deficit?

If you think you know the answer, please email it, with an extremely simple to understand explanation,  to:

chuka4streatham {at} gmail(.)com

PS  I’ll ask Chuka if he can provide a small cash prize for the best answer. 🙂

Eurozone electors have been sold a lemon!

Being sold a lemon means you have been tricked into buying something which is seriously defective. When you say that something is a lemon it implies that it is useless because it fails to work properly.


That’s a pretty good description of the the German dictated piece of financial engineering known as the Euro. It must rate as one of their worst ever engineering efforts. Even the much maligned East German Trabi is an engineering marvel by comparison.


Unlike the euro system, the Trabi has a starter motor to re-start the engine  after it has stalled!

The Euro, and the GSP rules that go with it, is clearly not fit for purpose. The Greek electorate is more than justified in demanding it be fixed under warranty. However, the makers have just declined, and are even insisting that the problems are all of the customer’s own making. No-one else has reported any problems! Except the Spanish, the Irish…….

There has to come a time when the buyer has to consider a  “lemon” is much more trouble than it is worth. The buyer  needs to stop making any further payments,  ask for a refund, ask for damages too,  and ultimately get rid of it.